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In a frozen economy, Palestinian IT makes the running

Many say the small but burgeoning Palestinian tech sector is on the verge of big things, aided by the lack of impediments to movement that Israel imposes in the name of security.

By Isabel Kershner, NY Times
July 29, 2012

RAMALLAH, West Bank — The spotless cafeteria is fashionably furnished with fluorescent orange and lime green tables, and there are table tennis and foosball tables in the basement. What else could it be but a tech start-up, even here?

The idea, of course, is to give employees something resembling the comfortable, innovation-friendly working conditions that are a hallmark of Silicon Valleys around the world, said Murad Tahboub, 42, the managing director of ASAL Technologies. Because that is what Ramallah, the West Bank city where the Palestinian Authority has its administrative headquarters, has ambitions to become: a hub for the information and communications technology industry.

With 120 employees, ASAL is one of the largest companies in the small but burgeoning Palestinian tech sector, which many of those involved say is on the verge of big things. “We are in the right position to have exponential growth,” said Mr. Tahboub, looking every bit the part with his slicked-back hair and black-rimmed Lacoste eyeglasses.

Compared with other industries that the anemic West Bank economy might look to develop, the information and communications technology sector has an advantage: it is much less affected by impediments to movement, like the barriers, checkpoints and permit requirements that Israelimposes on the territory in the name of security.

“This is a sector that has no borders,” Mr. Tahboub observed. “You just need electricity and a telephone line.”

In the four years since Cisco Systems made an initial strategic investment of about $10 million here, financing the beginnings of business-service outsourcing to Palestinian companies, supporting training programs and drawing in other international partners, the sector is said to have grown from less than 1 percent of the Palestinian economy to more than 5 percent today — albeit of an economy whose total output is estimated at a modest $5 billion to $6 billion.

For all the enthusiasm and talk of an emerging “ecosystem” from Palestinians newly proficient in the industry’s international argot, the technologists of Ramallah must still grapple with some of the challenges that confront the wider Palestinian economy and society, most notably the continued absence of the long-envisaged Palestinian state.

A World Bank report issued last week said that while the Palestinian Authority had made steady progress toward building the institutions required by a future state, the economy was currently not strong enough to support such a state, and remained too dependent on foreign aid. The report said it was critical for the Palestinian Authority to increase trade, spur private-sector growth and integrate the territory into the world economy as much as possible.

Experts and business leaders say that the main resource the Palestinians have to work with is their young, well-educated, entrepreneurial-minded population. But there is a need, they say, to overcome the image the world has of the territory as a volatile conflict zone where people ride to work on camels.

Though outsourcing contracts are the mainstay of the industry here, the model that the Palestinian infotech sector looks to is not India’s, with its immense population, but more that of Israel. “Innovation, creativity, being ahead of the curve” is the goal, said Tareq Maayah, 45, the chief executive of Exalt Technologies, “rather than relying on a huge quantity of basic skills.”

Like Israel, the Palestinians want a resilient tech sector that can be a politics-free zone. “The occupation is frustrating,” Mr. Maayah observed, “but Israelis and Palestinians have been working with each other in the worst of times.”

He said that Exalt handles outsourcing contracts from multinational companies operating in Israel and from some local companies as well. “Now we are producers and we sell to Israel, as opposed to just being consumers,” Mr. Maayah said. “It’s the start of a better balance in the economic relationship.”

Others noted that Israel has built a thriving technology sector even as it fought several wars in recent years.

There is no shortage of prospective employees; rather the opposite. About 2,000 Palestinians graduate from local universities each year in technical subjects, one-third to one-half of them women, but only about 30 percent of them find work in the local industry.

The Palestinian I.T. Association of Companies lists 125 members, about three-quarters of them based in the West Bank and the rest in Gaza, which is run by the militant group Hamas, not the Fatah-led Palestinian Authority. The entrepreneurs acknowledge that the industry is still in its infancy, with one estimating total outsourcing revenue at just $6 million a year. But they say it can be an attractive option for Israel-based firms because of its proximity, cultural familiarity, the talent of Palestinian engineers and their loyalty to their companies.

Sam Husseini runs LionHeart, a company that operates a training program with an Israeli partner to teach Palestinian entrepreneurs marketing skills. Two chief executives — Husni Abu Samrah of MobiStine, a start-up that designs health care applications in Arabic, and Saeed Zeidan of Ultimit, which develops software and does consulting work — each said they learned a lot from the training program, especially about what the industry still needs to thrive.

“The main thing is exposure,” Mr. Zeidan said. “We do not have exposure for the international market.”

Even so, Yahya al-Salqan, chief executive of Jaffa.Net, a software developer, said the regional market offered great promise. He observed that the Palestinian tech sector was uniquely placed in a “sandwich” between Israel’s so-called Silicon Wadi, less than an hour’s drive away on the Mediterranean coast, and what he called a huge emerging demand for technology services in Arab countries.

Mr. Salqan worked in Silicon Valley in California early in his career, and then returned home about 15 years ago to found Jaffa.Net, with one branch in Ramallah and another in Nablus in the northern West Bank. Jaffa.Net is working on mobile banking applications, and it will soon open an office in the Persian Gulf emirate of Qatar.

Many people here viewed Cisco’s arrival in 2008 as a turning point for the industry. It started by offering a year’s research and development financing to companies in Ramallah, and then began hiring Palestinian engineers on regular outsourcing contracts. More recently, it invested $5 million in Sadara Ventures, said to be the first venture capital fund focusing on the Palestinian territories.

Holding face-to-face meetings with Israel-based customers and investors is not always easy, despite the short distances. Mr. Husseini of LionHeart said his company had held meetings at Biankini Beach on the Dead Sea, south of Jericho, not because of the resort setting but because it was accessible to people from either side of the Israeli security cordon.

Zika Abzuk, Cisco’s senior manager for corporate affairs in Israel, related one instance when she and a team of Israeli employees was stuck on one side of a closed military checkpoint near Jericho while 16 Palestinian entrepreneurs they had hoped to confer with were stuck on the other. In the end, they held their meeting on neutral ground: a Bedouin-style reception tent at a gas station near the checkpoint.

The World Bank has said the recent economic growth in the Palestinian Territories is unsustainable because of its heavy reliance on foreign aid.

The Palestinian Authority had begun establishing institutions for a future state, but the economy was not strong enough to support it, a report warned.

It was critical to increase trade and spur private sector growth, it added.

The PA said last month it was facing a funding crisis, with debts of $1.5bn (£968m) and a cash shortfall of $500m.

The admission that civil servants would not be paid in July led some Palestinians to demand the dismantling of the PA, which was established under the 1994 Oslo Accords.

The World Bank said donor countries had propped up the Palestinian economy by giving the PA billions of dollars in aid, helping it achieve a 7.7% increase in GDP between 2007 and 2011.

But the report said the growth had only occurred in government services, real estate and other non-tradable sectors. The manufacturing and agriculture sectors had shrunk, and aid levels had begun to fall because of the global economic downturn, it noted.

“The Palestinian Authority has made steady progress in many years towards establishing the institutions required by a future state but the economy is currently not strong enough to support such a state,” said the author of the report, economist John Nasir.

“Economic sustainability cannot be based on foreign aid so it is critical for the PA to increase trade and spur private sector growth,” he added.

The report also said the security restrictions imposed by the Israeli government continued to stymie investment, but there was little that could be done about them until there was a peace agreement. Direct talks have been suspended since September 2010.

“However, there are a number of areas where the PA can focus its attention to not only improve current performance, but to lay the groundwork for a future state,” it said.

“A future Palestinian state should seek to emulate Asian countries that have managed to sustain high levels of economic growth by adopting an outward orientation and integrating into world supply chains.”